What Does It Mean to Flip a House?
House flipping is a type of real estate investing that has become increasingly popular in the last few years. Most investors look to buy houses at a low price, renovate them in a money-mindful way, and then sell them for much higher prices. This is known as “flipping” the house.
In contrast to other popular investment methods, house flipping does not always require you to buy and hold the home for too long. In fact, it is often in your best interest to flip the house as quickly as you can. Most investors flip a series of homes one after the other or at the same time. However, investors who invest in a downward market may choose to hold the property and rent it out until the market turns around and begins to grow again.
The profits made from house flipping are usually tied to value added to the home after purchase, usually through home repairs and renovations. The flipper may even add new design elements to the home to try and increase its market value. You can also make profits off of a quickly growing market where prices rise every week, however this strategy involves very careful timing and may not be the best bet for beginners.
Flipping a Home: Tips for Success
Home flipping is much riskier than other forms of investing because you are often times taking out a very large loan and risking a large sum of money. If you are unable to pay off the mortgage you incur, you may risk losing more than you planned for in the process. As such, it is crucial that you prepare thoroughly and arm yourself with the information needed to succeed.
Here are a few quick tips to improve your odds of success:
- Do Your Research: before buying a home, consider the location, area demographics, and market conditions. You also want to ensure that the renovations needed fall within your skill range and budget. Consulting a real estate agent, mortgage broker, and renovation company are great ways to gather this information.
- Leave the Building to the Experts: if you have no experience with construction or renovations, you may want to hire a contractor to make the repairs for you. While the DIY path may be cheaper, a faulty repair can have dangerous and expensive repercussions.
- Do the Math: before undertaking your house flipping project, compare the cost of your repairs and renovations to the value they are expected to add. Make sure that your plan is financially feasible.
- Be prepared to hold onto and carry the costs of maintaining and keeping your property for a while in the event that the market goes down before you have a chance to flip it.
5 Mistakes New Investors Make When Buying a House to Flip
If you are a new investor looking to flip your first house, here are some common mistakes you should avoid:
Spending Too Much Money
When first starting out in house flipping, it is a good idea to keep your financial risks to a minimum. The most common mistake new investors make is paying too much for the house they are trying to flip and underbudgeting renovations and improvements. Avoid paying a price for the house that will prevent you from affording the improvements you plan to make, and work with experts when estimating renovation costs.
Follow the 70 percent rule to buy a home you can afford. The purchase price of the home plus the cost of renovations should only amount to 70% or less of your estimated sale price. Of course, it can be difficult to make realistic estimates if you are an inexperienced flipper. In that case, you can avoid overspending by focusing your design efforts into necessary renovations and repairs. Changing the design of the entire home may not be financially feasible nor responsible.
Overestimating Your Abilities
House flipping is an art, one that can take years to master. When first getting started, it is a good idea to begin with a smaller project. Many rookie flippers overestimate their design abilities and bite off more than they can chew on their first project.
If you are coming into the industry with no construction or design experience, you may want to start with a quick fix. Look for a property that just needs a fresh coat of paint and some new appliances, or perhaps some new light fixtures. Although bigger projects can sometimes be more rewarding, by starting small you can avoid burnout and maximize your chances for long-term success.
Misunderstanding the Market
When calculating the value of your home, it is important to consider your target market. After all, the sale price of a home is a reflection of what people are willing to pay for it. Overpricing your home can lead to a lack of interest, and may even cause you to incur losses on your investment.
Beyond setting the price of your home, it is also important to tailor the renovations and design to your audience. Consider the demographics of the area and neighborhood. Would they pay a premium for your added design elements?
Running Out of Time
Flipping houses can be very time consuming with many projects taking between three to nine months to complete based on their difficulty. As a new investor, you may have trouble estimating how long your project will take you, but it is very important to have a rough idea of your timeline.
If your project takes a lot longer than anticipated, you may have to put your house on the market at an unfavorable time. Market prices could drop, demand could stagger, and you could end up making less profit than you anticipated. Another concern is that if you took out a loan to pay for the renovations, you may end up having to pay back the loan before you are able to sell the house or end up owing more money out of pocket to the lender after the sale is complete. It is important to be prepared for this scenario to avoid suffering greater financial losses.
When creating a timeline, it is important to consider your other commitments. If you are working a traditional job, you may only be able to dedicate your weekends and evenings to the construction process. Some investors opt to hire a construction crew, but it is important to note that you will still need to supervise the site from time to time.
Doing It All Alone
If you are a new real estate investor, you may be feeling overwhelmed at the thought of your first project. Luckily, Clover Mortgage is here to help. Unlike many brokerages, we work with over 50 different lenders and can help guide you through the process. We can even introduce you to professional builders and contractors who may be able to help you with budgeting and even completing the renovations themselves.
Each buyer is unique, and each mortgage lender will differ in their offerings and products. Our Clover Mortgage teams of brokers and underwriters are highly skilled and have access to over a hundred different mortgage products through our network of lenders. We will work with your best interest in mind and find a loan that meets your unique requirements.
If you are ready to begin looking for a mortgage, contact us today for a free consultation!